Will AMR's Bankruptcy Hurt Boeing?
It's all over but the crying. Following in the footsteps of airlines before it -- United Continental (NYS: UAL) and Delta (NYS: DAL) -- American Airlines parent AMR (NYS: AMR) accepted the inevitable and filed for a Chapter 11 bankruptcy.
Now, I'm not here to say, "We told you so" (but we did). I'm not even here to provide the requisite warning against trying to invest in the stock of a bankrupt company. (I'm assuming you know better than that.) Rather, I want to take a quick look at the AMR bankruptcy, and what it means for one real company that it's going to affect: Boeing (NYS: BA) .
As you may recall, just this past summer, AMR bullied Boeing into abandoning plans to design a new short-haul airplane, urging the company to instead "re-engine" its existing Boeing 737 aircraft -- or risk losing AMR's business. But even after Boeing acceded to the request, and declared its intention to create and sell a "737 MAX" variant with new General Electric (NYS: GE) engines, AMR gave the bulk of its business (260 plane orders) to Airbus, while ordering up only 200 of Boeing's planes.
Now Boeing may not even get that.
What the meaning of "is" is
I mean, if AMR is going bankrupt, that must mean it doesn't have any money. That's the definition of "bankruptcy," right? And if AMR has no money, then how can it buy any planes at all from Boeing?
That's a logical interpretation of this week's news, and if investors are worrying today that AMR's bankruptcy is bad news for Boeing, I can understand why. But here's the good news: This is not bad news for Boeing at all.
Think about it. Even if the doomsday-sayers are right, then relatively speaking, AMR's bankruptcy would hurt Airbus more than it would hurt Boeing. After all, Airbus got the bulk of AMR's new business this past summer. If that business goes "poof," then it's Airbus losing more revenues than Boeing, and Boeing that gets hurt less badly than Airbus. But in fact, I don't think even this scenario is likely. (And it seems I'm not alone. If you noticed, Boeing shares have been outperforming even the strong rally on the Dow Jones Industrial Average (INDEX: ^DJI) these past couple of days.)
What the meaning of "is" isn't
Here's why: If you listen to Boeing's read on the situation, AMR's bankruptcy might actually be good news for Boeing. Discussing the AMR filing at an analyst conference yesterday, Boeing Commercial Aircraft chief Jim Albaugh admitted that it was possible AMR might need to "restructure" the leases on some of the new airplanes Boeing will provide it. But according to Albaugh, "long-term ... the American bankruptcy is a very positive thing ... By going through a restructuring, they're going to come out of it a very competitive airline."
The key thing to remember, you see, is why exactly AMR is filing for Chapter 11. Namely, AMR has been unable to reach an agreement with its pilots union regarding a new work contract that would give the airline a more "competitive cost structure" (aka lower wages for pilots). This failure lies at the heart of AMR's bankruptcy filing, because in federal bankruptcy proceedings, a judge has the ability to unilaterally void labor contracts in order to protect a company's creditors.
If that's the way this Chapter 11 works out (and indeed, The New York Times reports that AMR may take a "harder negotiating stance with its unions"), then chances are, AMR will come out of this bankruptcy with more money available to spend on planes, rather than less.
Foolish final thought
In short, there seems little risk to Boeing in AMR's bankruptcy in the short term. Forward thinkers, though, might want to look a little further down the road to what might happen in the course of the bankruptcy proceedings.
After all, airline bankruptcies earlier this decade ultimately resulted in consolidation across the industry. It's possible that a bankrupt AMR might attract interest from a suitor such as US Airways (NYS: LCC) -- which tried and failed to gain scale from buying Delta a few years ago. I can envision a scenario in which US Airways looks at AMR's weakness as an opportunity to try again, makes a bid, and then moves to consolidate and right-size the combined company's fleet.
In that event, I would see a risk to Boeing's business, as US Airways' 70% Airbus-built fleet shows a decided preference for the European company's planes over those built by Boeing. Under new management, I would therefore expect to see Boeing orders trimmed, and Airbus orders emphasized as the company works to find the right product mix for its business. Stay tuned.
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